FPA-PMLA-2751/DLI/2018 of Jm Financial Asset Reconstruction Co… — Money Laundering

APPELLATE TRIBUNAL, PREVENTION OF MONEY LAUNDERING ACT AT NEW DELHI

1. MP-PMLA-5360/DLI/2018 (U.A.) MP-PMLA-5361/DLI/2018 (Stay) FPA-PMLA-2751/DLI/2018
JM Financial Asset Reconstruction Co.	…	Appellant/Applicant
2. MP-PMLA-5378/DLI/2018 (Stay) FPA-PMLA-2756/DLI/2018
Mr. Sundaresh Bhat (Resolution Professional for Sterling Biotech Limited)	…	Appellant/Applicant
Versus
Deputy Director, Directorate of Enforcement, Delhi	…	Respondent no. 1
Sterling Biotech Limited and Its Directors	…	Respondent no. 2
PMT Machines Limited and its Directors	…	Respondent no. 3
Sterling Energy Limited and its Directors	…	Respondent no. 4
Sterling Fitness & Wellness P. Ltd. and Its Directors	…	Respondent no. 5
Sterling International Enterprises Ltd. and Its Directors	…	Respondent no. 6
Sterling Oil Resources Limited and Its Directors	…	Respondent no. 7
Sterling Port Ltd and Its Directors	…	Respondent no. 8
Sterling Sez and Infrastructure Ltd. and Its Directors	…	Respondent no. 9
Nitin Jayantilal Sandesara	…	Respondent no. 10

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FPA-PMLA-2751 & 2756/DLI/2018

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Chetan Jayantilal Sandesara	…	Respondent no. 11
Dipti Chetan Sandesara	…	Respondent no. 12
Hitesh N. Patel	…	Respondent no. 13

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& Others

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Advocates/Authorized Representatives who appeared

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For the appellant no. 1	:	Mr. Samudra, S., Advocate Ms. Anjana Ahluwalia, Adv.
For the appellant no. 2	:	Mr.Rajshekhar Rao, Advocate Mr. Satendra K. Rai, Adv.
For the respondent no. 1	:	Mr. Nitesh Rana, Advocate
CORAM JUSTICE MANMOHAN SINGH	:	CHAIRMAN

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ORDER 07.01.2019

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FPA-PMLA-2751/DLI/2018 & FPA-PMLA-2756/DLI/2018

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Fresh appeals have been filed u/s 26 of Prevention of Money Laundering Act, 2002 against the order dated 29^th November, 2018 in O.C. no. 989/2018.

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Issue notice in the appeal as well as stay application for 18^th March, 2019. Let the replies be filed within six weeks with an advance copy to the counsel for the appellant who may file the rejoinders three weeks thereafter. Parties will also file the written synopsis by the next date of hearing.

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The learned counsel for the appellants are pressing for interim order. The prayer is strongly opposed by counsel for respondent. Heard both the parties.

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The main case of the appellant in appeal no. 2751/DLI/2018 is

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that;

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a. The appellant, being a secured creditor, has charge along with other lenders of the consortium, over the JMFARC Mortgaged Properties and Respondent no. 1 had no right to attach the same under the Provisions of the PMLA, since the provisions of the SARFAESI Act override the provisions of the PMLA in this regard. The appellant, being a secured creditor has priority over other rights to sell the property and recover the monies due to it and the same cannot be scuttled by attaching the secured assets under the PMLA, especially in the absence of any allegation of wrong doing on part of the secured creditor.

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b. It is submitted that the Impugned order suffers from serious non-application of mind and is a non-speaking order in so far as the Impugned Order does not adequately deal with the contentions of the Appellant, and the rights available to it under the SARFASI Act, which override the proceedings under the PMLA. The Authority has erred in the Impugned order by failing to consider the newly inserted section in SARFAESI Act and DRT Act respectively- Section 26 E and Section 31 B, which give priority to the secured debts over government debts, taxes, case etc.

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c. It is submitted that the Authority, while passing the Impugned order, has failed to appreciate the importance of the usage of ―as a result of criminal activity‖ contained in the definition of ―proceeds of crime‖ as provided in Section 2(u) of the PMLA. In fact, the Authority has proceeded on the basis that any property that was purchased by the entity/person accused of a scheduled offence would be liable to be confiscated under the provisions of the PMLA. However, a bare perusal of the definition of ―proceeds

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of crime‖ as provided for in the PMLA establishes that the property being attached must have been acquired as a result of criminal activity.

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d. The appellant only came to be associated with the account and assets of said sterling Entities prior to filing of any complaint/FIR or proceedings being initiated against the Sterling entities/Sandesara Group, by virtue of above referred assignment agreements.

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e. The appellant is completely disconnected from the alleged illegal acts committed by Sterling entities/Sandesara Group and/or its Directors/associates, and the Appellant was not in any manner whatsoever involved in any acts of money laundering, much less any offences punishable under section 3 of the Act. In fact, the appellant is itself a victim of the alleged fraud committed by the members of the Sandesara Group.

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The case of the appellant in appeal no. 2756/DLI/2018 is that;

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a. The Hon‘ble National Company Law Tribunal (―NCLT‖) vide its order dated June 11, 2018 has initiated the Corporate Insolvency Resolution Process (―CIRP Process‖) under the provisions of the Insolvency and Bankruptcy Code, 2016 (IBC) in respect of Sterling Biotech Limited (―SBL‖). By the same order, the Hon‘ble NCLT also appointed the Appellant as the Interim Professional (―IRP‖)to conduct the CIRP Process of DIPL.

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b. Subsequently, pursuant to the resolution passed by the Committee of creditors (―COC‖) constituted during the CIRP process of SBL, in their first meeting held on July 26, 2018, the Appellant was confirmed as the Resolution Professional (―RP‖)

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c. Presently. CIRP Process of SBL is at the stage of receiving the resolution plans and the last date for submission of resolution plans is January 02, 2019;

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d. The CIRP process of SBL is due to end on March 08, 2019.

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e. The CIRP process under the Insolvency Code is a time bound process. As per section 12 of the Insolvency Code, a period of only 180 (One Hundred and Eighty) days provided for completion of the CIRP process. The said period is, however, further extendable by a period 90 days pursuant to an order of the Hon‘ble NCLT upon an application made to that effect under section 12(3) of the Insolvency Code. Therefore, in any case, the entire CIRP Process is to be completed within a total period of 270 days. The said period of 270 days will be completed on March, 08, 2019.

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Mr. Nitesh Rana, appeared on behalf of the ED submits that the prosecution complaint has also been filed against the parties before the Special Court, Patiala Court, New Delhi. His further contentions is that the IBC does not override PMLA being criminal law therefore PMLA have the overriding provisions over IBC, 2016 which is a civil Law. He referred the pleadings, documents as well as finding of impugned order. He has strongly opposed the prayer of stay application. Both parties were heard on the stay application.

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It is not denied by Mr. Nitesh Rana, that the appellant in appeal no. 2751/DLI/2018 is a secured creditor and is a victim party. However he states that till the trial against the borrowers is concluded the financial institute is not entitled to recover the amount after disposing of the mortgaged properties. It is also stated that in case the financial

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intuition/appellant has any grievances, he will approach to the Special Court. Counsel for both appellants have read the mandatory provisions and submits that the jurisdiction only lies this tribunal to examine the issue with regard to the attached properties. It is stated even if the special court will pass the order of disposal of the properties the attachment order shall remain work against the appellant and no one will purchase the mortgaged property in situation of disposal of the properties will arise.

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The present appeals have been filed on various grounds challenging the impugned order as well as the provisional attachment order.

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This tribunal has held in many similar cases that the secured asset cannot be attached or confiscated when there is no illegality or unlawfulness in the title of the bank and that there is no charge of money laundering against the bank. It was further propounded that the bank would be entitled to recover its dues by proceeding against the mortgaged/Hypothecated properties under the provisions of SARFESI Act, 2002 and the RDDBFI Act 1993, as the Directorate of Enforcement would have no lien over the property which already stands legally transferred to the bank.

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The Adjudicating Authority as well as the Respondent No.1 have admitted the fact that the properties in issue has been Equitably Mortgaged in favour of the Appellant and so the other public sector banks against the secured asset.

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It is submitted on behalf of the appellants that mortgagees would be entitled to recover its dues by proceeding against the FPA-PMLA-2751 & 2756/DLI/2018 Page 6 of 16

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mortgaged/hypothecated properties under the provisions of SARFESI Act, 2002 and the RDDBFI Act 1993, as the Directorate of Enforcement would have no lien over the property which already stands legally transferred to the bank.

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This Tribunal has perused and examined the material available on records and has also heard the arguments of the learned counsel for both the parties.

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The Respondent–Deputy Director is relying upon the non-obstante clause in Section 71 of PMLA to claim priority over their debts due to the Appellant Bank. Section 71 of PMLA reads as under:-

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“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”

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There is no denial on behalf of respondent that appellant is a Secured Creditor and is entitled to priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority.

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The amended provisions of Section 26E of the SAR-FAESI Act, 2002 as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 which reads as under:-

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“26E. Priority to secured creditors. -

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Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or StateGovernment or local authority.”

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The amended provisions of Section31B of the Recovery of Debts due to Banks and Financial' Institutions Act, 1993 as amended by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 which reads as under:-

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“31B. — Priority to secured creditors.

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Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets, over which security interest is created, shall have priority and shall be paid in priority over all other debts and government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.”

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The above mentioned provisions had come into force w.e.f. 16.08.2016, empowering this Appellant Bank to have priority over the mortgaged property.

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The Hon'ble Supreme Court categorically held that if non-obstante clause is contained in two enactments, the non-obstante clause in the later enactment shall prevail over the non-obstante clause in the earlier enactment. In the case of Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. (2001) 3 SCC 71, the Supreme Court was considering the effect of the non-obstante clause contained in Section 32 of the Sick Industrial Companies (Special Provisions) Act, 1985 and Section 13 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

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The Hon'ble Supreme Court, while deciding this issue unequivocally, uphold its own catena of decisions echoed earlier, which are reported in-

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(i) AIR 1956 SC 614 - Ramnarayan vs. Simla Banking and Industrial Company Ltd.

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(1977) I SCC 750 - Sarvan Singh vs Kasturi Lal

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(1993) 2 SCC 144 = Maharashtra Tubes Ltd. vs State FPA-PMLA-2751 & 2756/DLI/2018 Page 8 of 16

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Industrial Investment Corporation of Maharashtra Ltd.

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(iv) (2000) SCC 406 - Allahabad Bank vs. Canara Bank

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The Hon'ble Supreme Court in the said case of Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. has approved the decision of the Special Court rendered by the Hon'ble Mr. Justice Variava, as he was then of the Bombay High Court reported in (1997) 89 Comp cases 547 clarifying that the non-obstante clause in the later enactment will prevail over the non-obstante clause in the earlier enactment.

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The following is the relevant portion of the decision of the Special Court, as appearing at Para 10 of the said Supreme Court Judgment:-

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“Where there are two special statues which contain non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier Legislation and its nonobstante clause. If the legislature. still confers the later enactment with a non-obstante clause, it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail, then it could and would provide inthe later enactment that the provisions of the earlier enactment continue to apply.”

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The afore-stated principle laid down by the Hon'ble Supreme Court has been followed by the Full Bench of the Hon'ble Madras High Court in a recent decision dated 10.11.2016 in W.P. Nos. 2675 (authored by Hon‘ble Mr. Justice S.K. Kaul, who is now the Hon‘ble Judge of Supreme Court). The Assistant Commissioner (Commercial Taxes) Vs. Indian Overseas Bank], in which the Hon'ble High Court upheld the provisions of the amended Section 31B of Recovery of Debts due to Banks and Financial Institutions Act, 1993. The following is the relevant portion of the said decision:-

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“3. There is, thus, no doubt that the right* of a secured creditor to realize secured debts due and payable by sale of assests over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority.”

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The said principle laid down by the Hon'ble Supreme Court has also been followed by the Hon'ble Madras High Court in another decision dated 22.12.2016 in W.P. No.27504 of 2015 and has upheld the provisions of the amended Section 26E of SARFAESI Act. The following is the extract of the relevant portion of the said decision of the Madras High Court:-

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“8. Concededly, the mortgage in favour of the petitioner Bank was created on 26.05.2005, which was prior to the date of attachment. The date of attachment, as indicated above, was 19.01.2015. To be noted, attachment entry was made by respondent No. 3, on 13.08.2015. This apart, the matter is now put beyond the pale of doubt, as during the pendency of the writ petition, an amendment has been made to the 2002 Act with the insertion of Section 26E. "

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23 . It is clear from the material placed on record that the Appellant being a Secured Creditor, since it had lent its own money to the Predicate Offender earlier, is entitled to priority over all other debts and government dues, including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. Hence, prima facie, there is no force in the submission of Respondent - Deputy Director that attached properties of the mortgagors cannot be dealt with and disposed of in order to recover the loan amount.

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The Hon'ble Andhra Pradesh High Court in the case of B. Rama Raju vs. Union of India &Ors. reported in (2011) 164 Comp Cases 149 in which the Hon'ble High Court has held that if the Adjudicating Authority is satisfied as to the bona fide acquisition of property, it should relieve

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such property from provisional attachment by declining to pass anOrder of confirmation of the provisional attachment.

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The following is the relevant portion of the Para 103 of the said decision passed by the Hon'ble Andhra Pradesh High Court :-

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“103. Since proceeds of crime is defined to include the value of any property derived or obtained directly or indirectly as a result of criminal activity relating to a scheduled offence, where a person satisfies the adjudicating authority by relevant material and evidence having a probative value that his acquisition is bona fide, legitimate and for fair market value paid thereof the adjudicating authority must carefully consider the material and evidence on record (including the Reply furnished by a noticee in response to a notice issue under Section 8(1) and the material or evidence furnished along therewith to establish his earnings, assests or means to justify the bona fides in the acquisition of the property); and if satisfied as to the bona fide acquisition of the property, relieve such property from provisional attachment by declining to pass an order of confirmation of the provisional attachment.

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The principle laid down in the above decisions of the Hon'ble Supreme Court and the Hon'ble Madras High Court has been followed by this Appellate Tribunal, Prevention of Money Laundering Act, New Delhi, in its catena of decisions, including the decision dated 14.07.2017 in a batch of Appeals filed by various Banks, namely, the State Bank of India vs. The Joint Director Directorate of Enforcement (and connected Appeals) against the Provisional Attachment Order.

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The Tribunal has held that as per the amended provisions of Section 26E of SARFAESI Act and 31B of the Recovery of Debts due to Banks and Financial Institutions Act, 1993, a secured creditor will have priority over all other debts and government dues, including revenues,

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taxes, cesses and rates due to the Central Government, State Government or local authority and accordingly, set aside the Provisional Attachment Orders.

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The following are the relevant paragaphs of the said Judgment dated

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14.07.2017

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“46. In the present case, it is undisputed fact that the attached property were purchased much prior to the period when the facility of loan was sanctioned to borrowers. The Bank while rendering the facilities were bona fide parties. It is not the case of the respondent that the attached properties were purchased after the loan was obtained. The mortgage of the properties were done as bona fide purposes. None of the bank is involved in the scheduled offence.

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In view of the entire gamut of the dispute, we are of the considered opinion that the conduct of the banks are always bona fide. Both banks are innocent parties.

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Thus in the present case even though the Ld. Adjudicating Authority had all the reasons to believe that the above mentioned were mortgaged to the Appellant Bank and that the Appellant/SBI had prior charge over the subject matter — 5 properties ;still the Ld. Adjudicating Authority confirmed the provisional attachment order of the respondent no. 1 and thus causing huge loss to the appellant SBI.

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We also find that the Adjudicating Authority has not examined the law on mortgages and securities.

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The property of the Appellant bank cannot be attached and confiscated when there is no illegality or unlawfulness in the title of the appellant.

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The respondent has no lien over the said properties as the appellant banks are now the legal transferees of the said properties.

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From the entire gamut of the matter, we are of the view that there is

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no nexus whatsoever between the alleged crime and the two banks who are mortgagees of all the properties which were purchased before sanctioning the loan. Thus no case of money-laundering is made out against banks who have sanctioned the amount which is untainted and pure money. They have priority as secured creditors to recover the loanamount/debts by sale of assets over which security interest is created, which remains unpaid.”

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This Tribunal in the above Judgment dated 14.07.2017 has also relied upon its own earlier Judgment dated 22.06.2017 in the case Indian Performing Right Society Ltd. vs. The Deputy Director, Directorate of Enforcement ,Mumbai, wherein the Tribunal held as follows :-

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―55. Whether innocent party whose properties i.e.movable or immovable are attached can approach the Adjudicating Authority for release of attached property.

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"The Scheme of Prevention of Money Laundering Act clearly provides the mechanism whereby the innocent parties can approach the Adjudicating Authority for the purpose of release of properties which have been attached in terms of the provisions of Section 5 of the Act. This can be seen by reading Section 8(1) and the proviso to Section 8(2) of the Act whereby Adjudicating Authority has to rule whether all or any of the properties referred to in the notice are involved in money laundering or not.

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The Appellant admittedly is an innocent party since it had already lent its own money to the Predicate Offender and the property in question being mortgaged to the Bank which is provisionally attached by the Respondent— Deputy Director ought to have been released by the Adjudicating Authority under Section 8(2) of PMLA.

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By virtue of conjoint effect of Sections 31B and 26E of The Recovery of Debts and Bankruptcy Act, 1993 and The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, the secured creditor i.e. Appellant herein (Punjab National Bank) shall have priority to the secured asset to satisfy their respective dues which shall prevail over and supersede the other debts government dues, revenues, taxes, cesses and rates due to the Central Government, State Government and local authorities.

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Admittedly, the National Company Tribunal vide its Order dated 11.6.2018 has initiated the Corporate Insolvency Resolution Process (CIRP).

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I do not accept the argument of the learned counsel appearing on behalf of the ED that their properties should not be dealt with CIRP process under the Insolvency Code.

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I also do not accept the argument that the said process should not continue, either to pay the entire amount or otherwise the property be sold immediately so that the banks and financial institutions may receive back their loan amount.

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The learned counsel appearing on behalf of appellant in both the appeals as well as respondent submitted that the total outstanding against the Sandesara Group including the Sterling Biotech Limited and their directors and proprietors is more than Rs.6,000 Crores. It is also informed that various agencies are investigating the said groups. Before completion of investigation, the accused parties have left the country.

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The learned counsel appearing on behalf of ED has placed the order passed by the Special Court dated 5^th January, 2009 whereby the court has issued the non-bailable warrants against the following accused persons, returnable for 14^th February, 2019:-

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(i) Accused A6 Nitin Jayantilal Sandesara;

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(ii) Accused A7 Chetan Jayaantilal Sandesara;

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(iii) Accused A8 Dipti Chetan Sandesara &

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(iv) Accused A9 Hiteshkumar Narendrabhai Patel

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It is also admitted position that the said group of companies have not only taken the loan from the appellant in the present case, but also taken the loans from various banks, including Dena Bank, Oriental Bank of Commerce, Federal Bank, most of them are Public Sector Banks. They have mortgaged various properties and the loans.

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It is a matter of surprise that how these persons after looted the huge amount from the banks, have left the country without completion of investigation against them. This Tribunal is of the view that stringent and shocked action should be taken against them who are enjoying the lavish life in the foreign countries by cheating the public amount.

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It is nothing less than a case of daylight robbery by the Sandesara Group of companies, including Sterling Biotech Limited and their respective owners. As mentioned, large number of properties have been mortgaged with the above mentioned banks and financial institutions, who are admittedly the secured creditors of the said amount. Some of them are public sector banks. The money due must go to the banks so that the banks should run the system in smooth manner. At present, no- one is known when they would return back and when the extradition proceedings are initiated against them and who will pass the orders thereon. Trial may take number of years. Therefore, blocking the

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process to receive the loan cannot be stopped as suggested by the ED. The present case is a classic example as to how the public money has been swindled by these groups and individuals.

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No one knows when enquired why theys have left the country and how they have managed to flee recently in pending investigation by various agencies, no one is aware whether they will ever return to home country and pay their debts, every one appearing is clueless on this question. Thus, the submission of ED can be accepted that unless the trial of accused parties is over, mortgage properties against the loan amount should not be dealt with. The borrowers will celebrate the said order if their properties to be kept in safe heaven for couple of decades

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In the light of above, till the next date of hearing, operation of the impugned order with regard to the mortgaged properties shall remain stayed. However, the Provisional Attachment Order dated 29^th May, 2018 shall continue.

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With regard to the other properties status quo shall be maintained by all the parties. It is directed that CIRF process under the Insolvency Code shall continue.

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